The demise of small-cap stocks is the latest example of the market starting to lose faith in some of the investing themes that had been driving this year's rally.
As part of the so-called Trump trade, companies at the lower end of the market-cap spectrum were expected to flourish. The idea was that lower corporate tax rates coupled with rising bond yields would drive more investor cash to the small-cap space.
However, neither of those two factors has come to pass. President Donald Trump's tax reform agenda remains stalled in Congress, and bond yields actually have declined since the beginning of the year. Small-caps benefit from lower taxes in the U.S. because they do most of their business domestically, while higher bond yields generally push investors out of larger stocks.
Jefferies equity strategist Steven G. DeSanctis is betting the "small-cap market does not go much higher from here," with the firm sticking to a 1,410 target for the Russell 2000, implying a "low-return environment."